Argo Blockchain plc

Good afternoon and welcome to the Argo Blockchain PLC Q1 2023 results investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time by the Q&A tab situated on the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question it received in the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Tom Devine, Vice President of Investor Relations. Good afternoon, sir.

Thanks, Alessandro. Before we begin, I'd like to remind everyone that today's presentation and remarks may contain forward-looking statements. For our full risk factors, please see our Form 20F filed with the Securities and Exchange Commission for the year 2022. I'd also like to point out that in our Q1 earnings and going forward, we'll be reporting our financial results in U.S. dollars. With us today for our discussion of Q1 2020-23 results are Saif El-Bakly, Argo's interim chief executive officer, and Jim McCallum, Argo's chief financial officer. And now, I'll turn it over to Saif.

Thanks, Tom. Hi, everyone. Good morning, afternoon. Saif here with my colleague, Jim. Thanks for tuning in today for Q1 2023 results. Just a few weeks ago that we provided you with our 22 year end results and a preview or Q1 23 going forward, we will provide timely quarterly updates, along with these earning calls. Before moving to Q1 I just wanted to remind everyone of our top priorities for the next couple of quarters these priorities include financial discipline and the leveraging which is top of mind. operational excellence, which is optimizing and growing our hash rate, and lastly, growth and strategic partnerships for the sustainable future of this company. We'll touch on these key pillars throughout the presentation as we discuss our results and our current projects. With that, let's look at how Q1 shaped up. As I mentioned on the previous slide, financial discipline remains a priority and one of our key pillars. As part of this, we're laser focused on cash flow generation and preserving cash. At the end of March, we had around $14 million of cash on the balance sheet. In the first quarter, we mined 491 Bitcoin and generated revenue of 11.4 million, which is an increase of 15% over our revenue from Q4 22. Our mining margin percentage came in at 49%, which is a significant increase quarter over quarter, up from 35% in the fourth quarter of 22. And that translated into an average cost per Bitcoin mined of $11,811. Aside from the price of Bitcoin and global hash rate, the other key variable that drives mining margin is our cost of power and hosting. For the first quarter, our average all-in power price and hosting rate came in at lower than $0.05 per kilowatt hour across all our operations. And that was lower than the previous guidance we had given on our year-end call of $0.05 to $0.055 per kilowatt hour. As we'll discuss in more details in later slides, we are extremely focused on reducing non-mining operating expenses. Compared to the quarterly average in the second half of 22, we were able to lower these operating expenses by 70%. And lastly, for the quarter, we generated an adjusted EBITDA of 1.6 million. I also wanted to briefly mention the spike in hash price that we experienced in May. This was due to higher transaction fees spawned by increased interest in ordinals. That was obviously beneficial for us, and you'll see the impact when we release our May operational update later this week. Now I'll let Jim provide some additional comments on the financial results for the quarter. Jim?

Thank you, Saif, and hello, everyone. As Tom mentioned, we are reporting our financial results in US dollars. The majority of our revenues, mining expenses, and debt are denominated in US dollars. so it is appropriate for Argo to report in USD. We generated 11.4 million of revenue for the quarter with 5.6 million of mining profit for a mining margin percentage of 49%. Our core business operations are profitable and we generated adjusted EBITDA of 1.6 million. In comparison to Q4 2022, we achieved higher revenues and lower expenses. we were able to reduce our non-mining operational expenses by 70%. At the end of the quarter, we had 14 million of cash on hand, which when combined with our operating cash flow, leaves us in a good position. Moving to the next slide, since closing the Galaxy transaction, we've been laser focused on reducing our non-mining operating expenses, and we have reduced these expenses by 70%. Our core non-mining operating expenses for Q1 were 4 million, and we have had further reductions since then. We're currently operating at just over 1 million per month in non-mining operating expenses. Turning to cash, as I mentioned, we ended Q1 with 14 million of cash on the balance sheet, a reduction of 6 million from December 31st. From an operating perspective, we generated 1.6 million of cash flow. Our core mining business is profitable, and this operating cash flow was offset by three main outflows during the quarter. Firstly, we had restructuring costs of 800,000 associated with reductions in headcount. Second, we had a reduction in working capital of 3.7 million, primarily related to the payment of invoices associated with the Galaxy transaction. And third, we had debt service and capital expenditures of 3.4 million. Excluding the restructuring and the working capital payments, our cash would have been approximately 4 million higher at March 31st, 2023. Moving to the next slide, the Galaxy transaction allowed us to significantly reduce our debt. However, we still have 79 million at March 31st, 2023, consistent with December 31st levels. Our goal is to reduce debt, and we expect to do so using cash flow operations and through the sale of non-core assets. Non-core assets include real estate, digital assets, certain parts inventory, and other investments. We look forward to reporting our progress on debt reduction in future news releases. With that, I'll pass it back to Saif.

optimizing our hash rate. We're excited to deploy our new epic blockchain block miners over the next few weeks and months, which, as discussed, will add around 300 petahash of additional hash rate capacity. We've been operating an initial deployment of block miners at Maribel for a few months now, and we've been very happy with their performance. So we're excited to deploy the rest of the machines in the coming weeks and months. Regarding our Quebec expansion project, we recently signed and finalized the agreement with the city of Baie-Comeau. which gives us access to an additional eight megawatts of power via our Baycomo facility, still sourced from hydroelectricity. We expect to be able to take advantage of this increased capacity in mid to late 24. And finally, as mentioned on our 2022 earnings call, our primary focus in the near term is really about building and maintaining a solid foundation for the company. But having said that, we continue to explore some interesting growth opportunities to maintain our market share as the hash rate network continues to grow. We've been talking to different energy companies about opportunities to utilize wasted or stranded energy. This helps them because it allows them to monetize otherwise wasted energy, and we in turn benefit from access to low cost and secure power. When we're thinking about growth opportunities, we're really thinking about innovative strategic partnerships with some key players within the power and energy spaces. That's it for now. Jim and I are open to taking your questions. Tom and Mark, off to you.

Safe, Jim. Thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the Q&A tab, which is situated on the top right-hand corner of your screen. Just while the company take a few minutes to review the questions submitted today, I'd like to remind you that recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your investor dashboard. As you can see, we received a number of questions throughout today's presentation. And Tom, if I may at this point hand over to you to read out the questions where it's appropriate to do so, I'll pick up from you at the end.

Right, thank you. Our first question comes from Kevin Didi at HC Wainwright. Has Argo had the opportunity to run any of the Epic block miner air cooled prototypes just yet? How much flexibility is there to over or under clock as a function of ambient air operating temperature?

Hey, Kevin, thanks for the question. So yeah, we've had a small deployment on the block miners at our Maribel facility for several weeks now. We're really happy with them. They're really efficient. I think as of lately, they're going at 30 joules per terahash. So we're really happy with their performance and what they've been doing. And the expectation so far has been great. They're purring, they're working very well, and we're happy with their performance. And we continue to work with, obviously, Epic and Intel as our partners. So, so far, so good. Thanks for the question, Kevin.

of Tahi at Roth MKM. What was your cost to mine of Bitcoin in Q1? And what's driving the increase in mining margin from Q4 to Q1? How do you think Q2 will turn out?

Hey, Darren, thanks for the question. So the margin, the mining margin for the quarter was 49%. And that was up, you know, from 35% in our Q4 22. And that translated into Bitcoin mine of about 11,800. Mining margins really driven by three factors, Bitcoin price, network hash rate, and power cost. I think in Q1, the average Bitcoin price was somewhere around 22,800, and that was 26% higher than the average in Q4. That was closer to about 18,000. The network hashrate obviously continued to grow in the effort did the average hashrate in Q1 was about 16 or 17% higher than Q4 and then power in Texas, I mean that I got cheaper, we saw in 2022 gas prices got really high power prices got really high, whereas in 2023 they fell more than 50% so. Obviously, if you combine all those three factors, net-net, it's been better. We've had better margins because of that. And I think in Q2, you know, Bitcoin prices have been even higher and gas prices have been a little bit lower. So, you know, I think our expectations for Q2 are positive.

Thanks, Dave. Our next submitted question comes from Jake M., Can you talk a little bit more about the impact to the business from ordinals?

Sure, so transaction fees for miners typically represent, and thanks for the question, by the way, Jake. Yeah, so transaction fees for miners typically yield about, or about two or 3% of our revenues. In May, that really shot up to about 13%. And some days was even much higher than that. but for certain blocks, obviously. So it really means that we ended up mining more block than we otherwise would have. And basically, we're going to be releasing our May operational update later this week. And you guys will be able to see the impact that it has had. But obviously, the ordinals worked out well for the industry and for us.

Thanks. Our next submitted question comes from Arash V. And this is for Jim. How do you plan on improving your cash flow?

Yeah, thanks for that. We generated 1.6 million in cash during the quarter, and we'll continue to generate cash through Q2. Ways we can improve our cash flow are continuing to focus on our operating expenses and through the sale of non-core assets. And as we pay down our debt, naturally our debt service costs will decrease, and that's also another important lever in improving our cash flows.

Great thanks, our next question comes from chase white at compass point for safe, are you able to disclose the cost breakdown of the hosting agreement with galaxy.

Absolutely hey chase thanks for the question, so I mean the cost breakdown is pretty simple we get access to power on a pass through basis. And then there's a fixed dollar amount per megawatt hour as a hosting fee based on our electricity usage. And so for Q1, the all-in price for both power and hosting fee came in sub five cents at Helios.

Thanks, Dave. Our next question, this is for Jim, submitted from Tom S. How are you planning on getting rid of your debt?

Yeah, thanks for that. Yeah. So beginning in May this year, we begin our principal repayments on the Galaxy loan. So we'll be paying that down every month. We're also, as I mentioned, exploring the sale of certain non-core assets and using those proceeds to also pay down our debt.

Thanks, Jim. Our next question is for Safe. How much additional CapEx is required for the Epic rigs?

Yeah, so thanks for the question. We don't really have much CapEx left to spend for the Epic rigs. There's maybe a small amount of taxes that we have to pay, but we really don't have anything left to pay. So that's really all baked in. And so I'm happy, excited to get these machines in the coming months and As mentioned before, we've had a small deployment of those machines operating and really happy with their performance. So thanks for the question, Daniel.

Our next question comes from Kevin Deedy again at H.G. Wainwright. What specifically changed to reduce OpEx by 70%? Was this headcount? How much of this change was realized by shifting operations of Helios to Galaxy? And this is for Jim.

Yeah, thanks Kevin. A large portion of the reduction was headcount, which reduced from over 90 to approximately 40 as of March 31st, 2023. While most of this shift was related to Helios and the Galaxy transaction, we did also reduce corporate staff. We also had some significant OPEX savings in insurance, for example, now that we don't operate the Helios facility. We've also implemented a robust internal process where we are scrutinizing our vendors in order to realize additional cost savings. So we're really looking at it all encompassing in order to reduce our costs.

Great. Thanks, Jim.

um our next question uh submitted comes from ds uh it's for safe how is the relationship with galaxy these days hey thanks for the question so i mean galaxy has been a great you know our relationship with galaxy has been great um it continues to be a very very positive one they have a great team they're really smart we're working very well together um You know we've been working very hard together on optimizing our machines and our performance in Texas are at Helios and and I think the skill sets been very complimentary so really happy to have them working with us and it's been a been a very positive relationship so.

Thanks, Dave. Our next question comes, and this will likely be our last question. This comes from Bill at Stifel. With the halvening less than 12 months away and continued growth in the network hash rate, how quickly will a company look to grow its hash rate with any equipment purchases going forward? Can we see more than the additional 300 petahash come online this year?

Yeah, so thanks for the question, Bill. So as you know, we've been operating at two and a half hexahash and we're looking at adding that additional 300 petahash. I would say we're keeping all our options open. We're really focused on deleveraging and cash flow. And in terms of growth, we're also very mindful of the network difficulty essentially going up. And so we're thinking about structuring potential strategic partnerships. We're thinking about how to grow while utilizing as little capex as possible. And I think all options are on the table. We're obviously very mindful of the having and the economics. And we're operating as if economics either stay the same or, you know, I think being prepared for the worst is the most important thing to do. Expect the best, but be prepared for the worst. And we are. And so right now it's about fixing the house, fixing the foundation, making sure that we're We have a strong and healthy balance sheet that can sustain a different economics, the having IE. And so, but you know, while keeping our options open and looking to potential strategic partnerships, low CapEx opportunities that will help bring our hash rate up.

Saif, Jim, Tom, thank you very much for that and for answering those questions from investors. Of course, the company will review all questions submitted today and will publish those responses on the Invest2Meet company platform. But perhaps just before redirecting investors to provide you with their feedback, which I know is particularly important to the company, Saif, can I just ask you for a few closing comments?

Yeah, of course. I really just wanted to thank everyone for their continued engagement with Argo and we're really encouraged by some of the improvements we're seeing in our operational and financial results. Our core business is cashflow positive and the team continues to focus really on maximizing cashflow and reducing debt. So we'll keep updating you through our progress and providing you with our quarterly financial releases with our earnings calls. So again, thanks everybody. Really appreciate everybody's engagements and we'll talk to everybody soon.

Perfect. And thank you very much for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete and I'm sure be greatly valued by the company. On behalf of the management team of Argo Blockchain PLC, we'd like to thank you for attending today's presentation and good afternoon to you all.